Exploring economic and financial instability within global markets and economies.

Friday, May 4, 2012

IMF - Leveraging Inequality

In 1983, the debt-to-income ratio of the top 5 percent of households was 80 percent; for the bottom 95 percent the ratio was 60 percent. Twenty-five years later, in a striking reversal, the ratio was 65 percent for the top 5 percent and 140 percent for the bottom 95 percent.

Read it at the IMFLeveraging InequalityBy Michael Kumhof and Romain Ranciére(h/t Tom Hickey @ Mike Norman Economics)A frequent topic I’ve tried to highlight on this blog is the role of private debt in both generating economic growth and financial crises. For the most part, private debt is considered in the aggregate for a country. When applying to PhD programs in Economics, I mentioned a desire to study the distribution of debt across classes of wealth and income. The goal is to find further evidence of debt’s role in the most severe recessions and depressions. As the chart above shows, my intuition that most of the debt burden likely fell on the poorer classes appears to have been correct. Hopefully future research, including my own, will create a deeper understanding of the economic effects of this type of inequality and offer improved policy options for preventing a reoccurrence of similar severity.

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